Litigation Risk and Audit Fees: The Impact of Qualitative Factors

61 Pages Posted: 12 Jul 2013 Last revised: 23 Sep 2013

See all articles by Paul J. Beck

Paul J. Beck

University of Illinois at Urbana-Champaign - Department of Accountancy

Zhiyan Cao

University of Washington Tacoma

Ganapathi S. Narayanamoorthy

Tulane University - Accounting & Taxation

Date Written: September 11, 2013

Abstract

Using D&O insurance premia from the 2001-2004 Tillinghast D&O insurance surveys as a proxy for litigation risk, we show that audit fees are positively associated with litigation risk even after controlling for several quantitative risk factors known to influence both the insurance premium and audit fee. We attribute this positive association to the parallel development of risk assessment expertise by both D&O insurers and auditors and to their overlapping sources of qualitative risk information. The significant association between D&O premia and audit fees also provides external validation for the auditor’s risk assessment process. Finally, we partition accounting firms based on their audit methodologies and find that the audit fees charged by risk-based auditors are more strongly associated with litigation risk than those charged by firms using more traditional audit approaches.

Keywords: audit fees, D&O insurance premium, litigation risk, audit methodology

JEL Classification: G22, K22, K41, M42

Suggested Citation

Beck, Paul J. and Cao, Zhiyan and Narayanamoorthy, Ganapathi S., Litigation Risk and Audit Fees: The Impact of Qualitative Factors (September 11, 2013). Available at SSRN: https://ssrn.com/abstract=2292699 or http://dx.doi.org/10.2139/ssrn.2292699

Paul J. Beck

University of Illinois at Urbana-Champaign - Department of Accountancy ( email )

1206 South Sixth Street
293 Commerce West
Champaign, IL 61820
United States
217-333-4563 (Phone)
217-244-3118 (Fax)

Zhiyan Cao

University of Washington Tacoma ( email )

1900 Commerce St, Campus Box 358420
Tacoma, WA 98402-3100
United States
(253) 692-4821 (Phone)
(253) 692-4523 (Fax)

Ganapathi S. Narayanamoorthy (Contact Author)

Tulane University - Accounting & Taxation ( email )

United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
443
Abstract Views
2,986
rank
78,569
PlumX Metrics